Merkel, Scholz, the German Social Democrats and the Meaning of the Left

Angela Merkel is stepping down, and as often happens in these circumstances (or when someone of historical importance passes; see here for my review of Thatcher and Volcker obits) there is a flood of analysis of their contributions. Merkel is no exception, and most 'serious' outlets have suggested that she was a great stateswoman, and that she managed to save the euro (an honor she often shares with Mario Draghi), the European Union and provided leadership in the midst of the vacuum caused by Donald Trump (see here, or here, for example). The newspaper of record, linked there, says that: "Chancellor Angela Merkel steered Europe through crises, and Germany has boomed during her tenure." I kid you not! Yes, boomed. The actual real GDP growth was about 1.1 percent on average during her tenure (as per graph; data from the Conference Board).

Note that there is no acceleration of growth, that has remained low since reunification with Helmut Kohl, and with the brief interregnum of Gerhard Schröder, the center-left (more on that below) leader of the social democrats in the early 2000s. The New York Times suggests, not incorrectly (at least on this) that she leaves many economic problems behind, but argue that those stem from lack of investment in education (the 'human capital' mantra) and on high-tech technologies. Note that investment often follows growth, and that has been anemic in Germany, and productivity follows growth, including in the high tech industries. It is demand driven. Merkel did not create the neoliberal model, but she certainly followed it.

Her legacy should be tied to the euro, and to Greece (I wrote quite a bit on Greece over the years; see here, and in the other blog here starting even earlier in 2010), and there her legacy of austerity, fiscal adjustment, which allowed Germany to maintain fiscal and current account surpluses (the measure of her success, I would guess), is an undeniable disaster. Greece GDP never recovered (see figure below; same source).

In other words, nobody should think that these is something to be emulated. The reason right-wing, photo fascist parties, like some of the craziest stuff that one can see in the United States are possible in Europe is because of the policies that she adopted. Of course, as I noted these policies precede her, and Kohl, the German version of Reagan and Thatcher deserves a lot of the credit, both as instrumental on the unification, which still has important implications for the levels of employment in the ex-Eastern Germany, and the policies that led to the euro. Of course, it took a social democrat, Schröder, to promote the labor market reforms (essentially, more flexible markets, making it easier to fire workers, and providing lower benefits for the unemployed) and a policy of wage compression.

And that brings us to Olaf Scholz, Merkel's finance minister, and the leader of the social democrats (which were in many ways a reference for the left globally at some point in the very distant past), which are uniformly described as center-left (NYTimes here). I will not spend too much time discussing that, but I would note that a left of center government must have policies to promote the wellbeing of the working class, including higher wages and something that resembles full employment. The German Social Democrats are not that. And if Mr. Scholz manages to form a coalition government, it will be with the Greens, which will push for degrowth (on that see this old post), and perhaps with the neoliberal Free Democratic Party, mostly people that have not seen a fiscal adjustment plan they did not like. So Merkel's legacy lives on.

Oscar Ugarteche on German Debt Reduction

"The largest debt problems in terms of GDP faced in financial history have belonged either to the United States or to European Governments. Large debt problems in developing and emerging nations have usually stemmed out of a drop in GDP size due to a fall in export earnings and a rise in interest rates. The reason is that creditors stop lending at a certain point and start restructuring existing debt which leads to debt growth but it is not really new lending. In major nations, lending goes on as the strategic reason for borrowing has normally been justified: a war. As a result, the leading debt reduction and innovative management schemes are related to these. Contrary to the impression generated by extensive works on the Latin American and African debt, it is the under researched European and US historical debt that must be looked into in order to understand some historical solution patterns to debt problems. Current European very high debt levels (over 90% of GDP) are due partially to accumulated current account deficits of over 3% of GDP for over a decade plus the cost of bank rescues in 2009-2010 plus some countercyclical policy costs. Greece has additional debt due to major infrastructure works. It entered the Euro with a high debt level (around 100% of GDP) but the total GDP amount shrunk 33.3% from 55,318 million euros to 36,866 million euros in constant terms between 2007 and 2013 as a result of austerity policies. If GDP had remained stagnant, the index would be 131% and not 174.9% and rising."

Read rest here.

Mark Weisbrot on Economic and Social Policy and the Problems of the Eurozone and European Integration

By Mark Weisbrot

It was not because of the power of financial markets or because the Germans didn't want to "help" the Greeks that Europe suffered through about three years of recurring crises, in which the continued existence of the euro was thrown into question, until August 2012. It was because the European authorities were using these acute crises and did not want to resolve them until they had extracted certain "reforms" from the weaker European economies (and possibly even some of the stronger ones, if we consider the European Fiscal Compact and what the French government has been doing recently). We know this because as soon as the European Central Bank (ECB) wanted to do so, it put an end to these crises in a matter of weeks, in July-August 2012, by effectively establishing a ceiling on the interest rates of Italian and Spanish bonds - something it could have done at any time in the prior three years.

Read the rest here.

The Portuguese inevitable collapse

The Portuguese economy is not in the headlines as much as the other peripheral economies in crisis, but the troubles, and its political consequences are no less deep. Austerity has led to a collapse of output, that fell by around 4% in the first quarter of the year, the worst fall after Greece and Cyprus, respectively. Spreads with German bonds hiked, and two coalition ministers have resigned. However, this has been a long crisis in the making. Graph below shows industrial production (index equal to 100 in 2005) in Portugal and Germany, since the euro.

Note that the trend is there from the beginning. And it should have been expected too. No reasonable model predicts that with capital mobility and no barriers would lead to production to be spread rather than concentrated. Other than major fiscal transfers, the euro arrangement was unavoidably going to create increasing disparities. And by the way, the political crisis cannot end, if the economic collapse continues.

Europe’s crisis without end: The consequences of neoliberalism run amok

By Thomas Palley

This paper argues the euro zone crisis is the product of a toxic neoliberal economic policy cocktail. The mixing of that cocktail traces all the way back to the early 1980s when Europe embraced the neoliberal economic model that undermined the income and demand generation process via wage stagnation and widened income inequality. Stagnation was serially postponed by a number of developments, including the stimulus from German re-unification and the low interest rate convergence produced by creation of the euro. The latter prompted a ten year credit and asset price bubble that created fictitious prosperity.

Postponing stagnation in this fashion has had costs because it worsened the ultimate stagnation by creating large build-ups of debt. Additionally, the creation of the euro ensconced a flawed monetary system that fosters public debt crisis and the political economy of fiscal austerity. Lastly, during this period of postponement, Germany sought to avoid stagnation via export-led growth based on wage repression. That has created an internal balance of payments problem within the euro zone that is a further impediment to resolving the crisis.

There is a way out of the crisis. It requires replacing the neoliberal economic model with a structural Keynesian model; remaking the European Central Bank so that it acts as government banker; having Germany replace its export-led growth wage suppression model with a domestic demand-led growth model; and creating a pan-European model of wage and fiscal policy coordination that blocks race to the bottom tendencies within Europe.

Countries, particularly Germany, can implement some of this agenda on their own. However, much of the agenda must be implemented collectively, which makes change enormously difficult. Moreover, the war of ideas in favor of such reforms has yet to be won. Consequently, both politics and the ruling intellectual climate make success unlikely and augur a troubled future.

Read the whole paper here.

ECB anti-inflation policy effective in Germany?

Roberto Frenkel published an op-ed in an Argentine newspaper (here in Spanish) in which he says that while anti-inflation policy by the ECB in Spain was ineffective, but "the same anti inflation policy of the European Central Bank was effective in Germany. There it had an important component of cooperation. The Bundesbank participates in the negotiation of wage increases with the unions." The idea that the ECB has been effective in Germany is peculiar, to say the least.

One of the most criticized elements of German policy, at least by heterodox authors like Jörg Bibow for example, is the wage restraint and fiscal austerity. As he says (p. 20):

"With domestic demand persistently 'sick,' thanks to unconditional austerity and wage restraint, exports were Germany’s lifeline and sole—albeit cyclical—engine of growth. Protracted stagnation in Germany meant a correspondingly easier 'one-size-fits-all' ECB stance for Euroland, far too easy for the periphery, where bubbles were nourished as a result."

In fact, as the picture below (h/t Franklin Serrano) shows, real wages in Germany have not expanded with productivity and have been stagnant in the euro era, in fact falling a little bit.

Note also that Germany, in spite of its relative success, has grown over the whole euro period less than the US. A peculiar notion of successful anti-inflationary policy. Frenkel seems to suggest that Argentina may still not need to resort to the sort of stabilization (which he calls heroic) based on a nominal exchange rate anchor, but can do with normal fiscal and monetary restraint. In his view, inflation is always and in every place a matter of excess demand.

It misses the point that fiscal austerity in Germany and in Europe has had the role of keeping the working class demands in line. In other words, the very same real wage stagnation that you see above. I guess in Argentina the 'heterodox' thing to do now, if you believe Frenkel, is the old IMF/Monetarist solution, big devaluation cum fiscal and monetary contraction!